Q&A with UK Mortgage SpecialistRay Boulger

Ray Boulger, Senior Technical Manager at John Charcol, joined Experience Invest in an interview on our radio day to speak about the property market moving forward for investors and major changes to the sector.

At the start of April this year, the government brought in its latest move to tax landlords on their property. From April 6th, landlords face changes to mortgage tax relief, which comes just 12 months after new purchases of stock started to come with an additional three per cent cost.

We spoke to Ray Boulger, Senior Technical Manager at John Charcol, on our radio day to find out more about these changes and what they will mean for landlords and tenants in the private rented sector over the months and years to come.

What are the new rules that came into effect recently, and how do they affect landlords?

The main change is that, up until now, landlords, like any small business - which is essentially what they are - have been taxed on their profit. So, if you're making a few thousand pounds’ profit on your buy-to-let, that's added to your other income, and that's the basis for how you're taxed.

As from [April 6th], instead of that system, landlords have to add their total rental income to their overall income. And then they can offset some expenses, in particular, the amount of mortgage interest they can offset is steadily being reduced.

The impact of this for many landlords is that basic rate taxpayers, who have income in the 30K, will be pushed into the higher tax bracket, and that's clearly going to increase their tax liability.

The government believes that this makes the tax system fairer for all, but do you think this is the case?

Frankly I think that's complete rubbish. If you are working as a landlord, you are running a small business, and the risk here is that this could be a slippery slope of the government starting to tax other small businesses they might not like for some reason in the same way.

Now, many businesses are, of course, taxed on turnover in terms of VAT. And if the government wants to tax on turnover, that's how they should do it. Profit of a business should be the basis of tax, not turnover.

Will the new changes to taxation also affect those landlords who have become limited companies?

The people who will not be affected by this will be the people who do not have a mortgage on their property, and the people who own their property through a limited company. If you own through a limited company, you will pay tax on profits, not on the rent income.

And of course, as corporation tax comes down, they're going to benefit from a slight reduction in tax. So there is going to be a significant difference between people owning property under their personal name, and under a limited company.

And whilst if you already own the property, switching it to a limited company in many cases will not be tax efficient, because you will incur Stamp Duty and probably capital gains tax. Certainly, for people buying property from now on, that's definitely something they should consider.

Is there a risk that these moves from the government will actually complicate matters?

Well, certainly it makes life more complicated. It will increase work for accountants and maybe solicitors. So that perhaps will generate a bit of extra tax for the government. But I think the real danger here is that if you [remove incentives from] potential landlords too much by making it less profitable to own a property, then some landlords will be selling their property - we've already seen that - and some landlords who might have bought will not do so.

If that trend accelerates too much - and at the moment I wouldn't say that's happening but it could easily happen over the next few years after tax increases - the danger is that there will be less property to rent. And that of course means tenants will have less choice, and inevitably rents will go up beyond what they otherwise would have done, and of course, most tenants already think rents are too high.

Could fewer rental properties available mean stock comes into the market and pushes house prices down?

That's theoretically possible. Part of the government's rationale was that if property is less profitable for landlords to buy, it would make it easier for first-time buyers. Frankly I don't think it's as simple as that. Most first-time buyers are not buying for other reasons, such as they can't borrow enough, can't earn enough to justify the mortgage they need.

So as long as we're in a situation where demand for property exceeds supply, I think what you're suggesting is likely to be irrelevant.

Are we likely to see rents going up after the changes as landlords pass costs on to tenants?

Certainly quite a few landlords did initially react to these tax changes by saying they would plan to increase rent. In real life, it's of course not that simple, because rents are set by supply and demand, and if your costs go up, you may need to increase prices to make it worthwhile. But nothing happens in isolation, and there's a whole raft of different factors influencing rental prices.

One benefit that landlords have had over the last few months, specifically since Brexit when interest rates had fallen, is that mortgage rates have gone down. And that's partly because interest rates generally have fallen. It's also because the demand for buy-to-let mortgages has fallen off quite sharply in the last year, partly because of these tax changes, and also because of the three per cent Stamp Duty.

Lenders have reacted by cutting mortgage rates, so there are pros and cons in all of these situations, but ultimately, the rent that landlords can charge will be dictated by how much demand there is for property.

I think the danger for tenants is that if too many landlords are persuaded to either sell their property or not come into the market, as a result of which there's not as much property to rent, then tenants will not only have less choice, it will force rents up. But I don't see that happening in the short term.

Are buy-to-let landlords almost 'under attack' from the government?

Well the government's rationale, or so they claim, is to help first-time buyers. Their thinking being that if you make property purchasing less attractive for landlords, that will make some property free for first-time buyers and others.

The real reason, I think, is more about raising tax. But I think the government is playing a dangerous game here, because the proportion of people owning a property has been steadily declining. It peaked in 2003 at 71 per cent. And while it seems to have stabilised at the moment, it's now down to 63 per cent.

So of the 37 per cent who rent, up until a few years ago the majority of those rented in the social sector, typically from housing associations and councils. Now, and progressively, that's been changing. Most people now rent from the private rental sector. So if the government makes it unattractive for landlords, then the danger is that there will be less property to rent, and that can only hurt tenants.

Is transferring a property to a spouse, for example, a way to get around these changes?

For people who already own a property, it's unlikely to be worthwhile switching to a limited company. One solution for those people, if they're married or in a civil partnership, where there'd be no tax implications, is to put the property in joint names. It may be that they want to own it equally, or they may want to own it unequally so if the property is owned on a ‘tenants in common’ basis, the spouse could perhaps own 99 per cent and the original purchaser could own one per cent.

The reason for doing it that way is that if you need a mortgage, most lenders require borrowers to have an income of £25,000, and in some cases more. So, by having the property in joint names, you can satisfy the lenders' requirement, but also from a tax point of view, you are putting most of the income and profit into the lower earning spouse.

So that can be a good solution for people who already own properties, and perhaps for those who are buying property now.

Would they need to look out for the risk of shifting tax boundaries?

Absolutely, if you have a non-working spouse or a spouse with a relatively low income, where the rental income means that the total income will still be below the 40 per cent tax band, at £45,000, then that can be a really good solution.

But everybody's situation is different, and you also need to think about what's going to happen in the future. If your spouse only has a low income or no income now because they're on maternity leave and that's going to change in two years’ time, then this might not be a sensible solution.

Ray is well known as a mortgage expert, and is a fountain of knowledge when it comes to property in the UK. Between his time spent working with a chartered accountant firm and his 18 years as a stockbroker, Ray has spent his whole working life in finance, and has been at John Charcol since 1989, where he has since spent ten years as senior technical manager.

As well as being a board member of the Association of Mortgage Intermediaries (AMI) and a member of the MCCB Advisory Committee, Ray has won numerous awards throughout his career, including being named Mortgage Strategist of the Year and The Guru of the Year at the Headlinemoney awards.

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